Orion Group Half-Year Financial Report January-June 2017
ORION CORPORATION HALF-YEAR FINANCIAL REPORT JANUARY-JUNE 2017 19 JULY 2017 AT 13.15 EEST
Orion Group Half-Year Financial Report January-June 2017
Orion's net sales in January-June 2017 totalled EUR 552 million (EUR 535 million in January-June 2016).
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Operating profit was EUR 164 (164) million.
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Profit before taxes was EUR 160 (162) million.
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Equity ratio was 58% (57%).
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ROCE before taxes was 44% (45%).
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ROE after taxes was 43% (46%).
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Basic earnings per share were EUR 0.90 (0.92).
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Cash flow per share before financial items was EUR 0.40 (0.56).
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The outlook estimate for 2017 remains unchanged. Orion estimates that in 2017 net sales will be at similar level to 2016 and operating profit excluding material capital gains will be at least EUR 280 million.
ORION'S KEY FIGURES FOR THE REVIEW PERIOD
Q2/17 | Q2/16 | Change % | H1/17 | H1/16 | Change % | 2016 | |
Net sales, EUR million | 272.4 | 273.1 | -0.2% | 551.6 | 535.1 | +3.1% | 1,073.5 |
Operating profit, EUR million | 71.8 | 83.5 | -14.0% | 163.5 | 163.9 | -0.2% | 314.6 |
% of net sales | 26.4% | 30.6% | 29.6% | 30.6% | 29.3% | ||
Profit before taxes, EUR million | 70.7 | 82.6 | -14.4% | 159.5 | 162.3 | -1.7% | 310.9 |
% of net sales | 25.9% | 30.2% | 28.9% | 30.3% | 29.0% | ||
Income tax expense, EUR million | 14.2 | 16.9 | -16.0% | 32.7 | 33.3 | -1.7% | 61.9 |
R&D expenses, EUR million | 26.6 | 28.4 | -6.4% | 52.3 | 53.4 | -2.0% | 118.2 |
% of net sales | 9.8% | 10.4% | 9.5% | 10.0% | 11.0% | ||
Capital expenditure, EUR million | 23.9 | 13.2 | +81.4% | 39.3 | 22.2 | +76.8% | 51.1 |
% of net sales | 8.8% | 4.8% | 7.1% | 4.2% | 4.8% | ||
Assets total, EUR million | 947.5 | 935.7 | +1.3% | 1,062.9 | |||
Equity ratio, % | 58.4% | 56.5% | 60.8% | ||||
Gearing, % | 15.2% | 12.8% | -12.4% | ||||
Interest-bearing liabilities, EUR million | 151.4 | 186.7 | -18.9% | 152.5 | |||
Non-interest-bearing liabilities, EUR million | 245.8 | 225.9 | +8.8% | 269.0 | |||
Cash and cash equivalents and money market investments, EUR million | 67.7 | 119.7 | -43.4% | 231.9 | |||
ROCE (before taxes), % | 43.9% | 45.2% | 40.9% | ||||
ROE (after taxes), % | 42.5% | 46.2% | 40.3% | ||||
Basic earnings per share, EUR | 0.40 | 0.47 | -13.9% | 0.90 | 0.92 | -1.5% | 1.77 |
Diluted earnings per share, EUR | 0.40 | 0.47 | -13.9% | 0.90 | 0.92 | -1.5% | 1.77 |
Cash flow per share before financial items, EUR | 0.06 | 0.27 | -76.7% | 0.40 | 0.56 | -29.2% | 1.62 |
Equity per share, EUR | 3.91 | 3.72 | +5.1% | 4.57 | |||
Personnel at the end of the period | 3,633 | 3,528 | +3.0% | 3,469 | |||
Average personnel during the period | 3,518 | 3,428 | +2.6% | 3,446 | |||
Personnel expenses, EUR million | 112.1 | 113.2 | -0.9% | 224.4 |
President and CEO Timo Lappalainen:
"Year has progressed as planned"
"In the first half of 2017 our net sales grew slightly from the comparative period and our operating profit was at similar level to January-June of the previous year.
"In Proprietary Products sales of the Easyhaler product family for treatment of asthma and chronic obstructive pulmonary disease have continued to grow, led by the Bufomix Easyhaler combined formulation. In addition, in the beginning of April we submitted a marketing authorisation application in Europe for a new salmeterol-fluticasone combined formulation in the product family. As regards our other key proprietary products, sales of the intensive care sedative Dexdor remained strong, despite the start of generic competition in Germany. Sales of Simdax for treatment of acute decompensated heart failure, which has been in the markets for a long time, have also continued to grow. As expected, sales of Orion's branded Parkinson's drugs Stalevo, Comtess and Comtan declined, but other growing products have been able to compensate for this decease. Sales of Proprietary Products as a whole were slightly greater than in the previous year.
"Net sales of the Specialty Products business division were slightly higher than in the comparative period. Changes in the market environment and ever-intensifying price competition, especially in Finland, where changes were made to the pricing system for substitutable prescription drugs at the beginning of the year that narrowed the so-called price band, had a negative impact on net sales of the business division. However, winning the national tendering competition in Norway increased sales of the biosimilar Remsima relative to the comparative period.
"Sales of Fermion, which manufactures active pharmaceutical ingredients, developed well in the first half of the year, and its net sales excluding deliveries for Orion's own use clearly increased. In recent years order cycles in the trade in pharmaceutical raw materials have become ever shorter, and this has led to clearly greater fluctuation in business volume than before within each year and between different years. Sales of veterinary drugs have also grown, mainly due to the timing of deliveries of animal sedatives to collaboration partners compared with the previous year.
"Sales and marketing costs have grown due to increased sales efforts in Easyhaler products, for example.
"Orion's research and development programmes have proceeded as planned.
"We estimate that in 2017 net sales will be at similar level to 2016. We estimate that operating profit excluding material capital gains will be at least EUR 280 million. Our outlook estimate and the basis for it can be found in this report under 'Outlook for 2017' and 'Basis for outlook'."
Events during the period
On 6 April the amendments to Sections 5 and 9 (1) of Orion Corporation's Articles of Association were entered in the Trade Register.
Events after the period
There were no significant events after the period.
News conference and teleconference
A news conference and teleconference on the published results will be held on Wednesday 19 July 2017 at 13.30 EEST in Hotel Kämp (address: Pohjoisesplanadi 29, Helsinki). President and CEO Timo Lappalainen will give a brief presentation in English on the financial review.
The event can be followed as a live webcast accessible on Orion's website at http://www.orion.fi/en/investors. After the presentation, questions can be asked also via teleconference in Finnish and English.
The conference call ID is 3998996 and the telephone numbers to participate in the teleconference are:
Finland: | +358 (0)9 7479 0404 |
Sweden: | +46 (0)8 5065 3942 |
United Kingdom: | +44 (0)330 336 9411 |
United States: | +1 719 325 2202 |
News conference recordings
A recording of the webcast of the event in English and a recording of the presentation by the President and CEO in Finnish will be published on Orion's website during Wednesday 19 July 2017.
Financial report material
Financial reports and related presentation material are available at http://www.orion.fi/en/investors promptly after publication. The website also has a form for subscribing to Orion's releases.
Dates in Orion Calendar 2017-2018
Interim Report January-September 2017 | Thursday 26 October 2017 |
Financial Statement Release for 2017 | Wednesday 7 February 2018 |
Annual General Meeting 2018 | Planned to be held on Tuesday 20 March 2018 |
Interim Report January-March 2018 | Tuesday 24 April 2018 |
Half-Year Financial Report January-June 2018 | Wednesday 18 July 2018 |
Interim Report January-September 2018 | Wednesday 24 October 2018 |
The Financial Statements and Report by the Board of Directors for 2017 will be published on the Company's website at the latest in week 9/2018.
For additional information about the report:
Jari Karlson, CFO tel. +358 50 966 2883
http://www.orion.fi/en
http://www.orion.fi/en/investors
Financial review 1/1/2017-30/6/2017
Net sales
The Orion Group's net sales in January-June 2017 were up by 3% at EUR 552 million (EUR 535 million in January-June 2016). The net effect of currency exchange rates was plus EUR 3 million.
The Pharmaceuticals business's net sales were up by 3% at EUR 526 (509) million. Net sales of Orion's Stalevo ® (carbidopa, levodopa and entacapone) and Comtess ® /Comtan ® (entacapone) Parkinson's drugs were down by 19% at EUR 58 (72) million, which was 11% (14%) of the Pharmaceuticals business's net sales.
The Diagnostics business's net sales were down by 4% at EUR 27 (28) million.
Operating profit
The Orion Group's operating profit was EUR 164 (164) million. Milestone payments accounted for EUR 8 (9) million of the operating profit.
The Pharmaceuticals business's operating profit was EUR 164 (165) million. Milestone payments accounted for EUR 8 (9) million of the operating profit.
The Diagnostics business's operating profit was up by 8% at EUR 4.8 (4.4) million.
Operating expenses
The Group's sales and marketing expenses were EUR 101 (93) million.
R&D expenses were EUR 52 (53) million and accounted for 10% (10%) of the Group's net sales. Pharmaceutical R&D expenses amounted to EUR 49 (50) million. Research projects are reported in more detail under Pharmaceuticals in the Business Reviews.
Administrative expenses were EUR 24 (23) million.
Other operating income and expenses were EUR 0 (-0) million.
Group's profit
The Group's profit before taxes was down by 2% at EUR 160 (162) million. Basic earnings per share were EUR 0.90 (0.92) and diluted earnings per share were EUR 0.90 (0.92). Equity per share was EUR 3.91 (3.72). The return on capital employed before taxes (ROCE) was 44% (45%) and the return on equity after taxes (ROE) 43% (46%).
Financial position
The Group's gearing was 15% (13%) and the equity ratio 58% (57%).
The Group's total liabilities at 30 June 2017 were EUR 397 (413) million. At the end of the period, interest-bearing liabilities amounted to EUR 151 (187) million, including EUR 150 (176) million of long-term loans.
The Group had EUR 68 (120) million of cash and cash equivalents and money market investments at the end of the period.
Cash flow
Cash flow from operating activities was EUR 92 (101) million, the cash flow from investing activities was EUR -36 (-21) million, and the cash flow from financing activities was EUR -219 (-200) million.
Capital expenditure
The Group's capital expenditure totalled EUR 39 (22) million. This comprised EUR 32 (19) million on property, plant and equipment and EUR 7 (3) million on intangible assets. Fermion has an ongoing significant expansion investment at its Hanko manufacturing plant, and Orion has ongoing expansion of Easyhaler production capacity at its Espoo pharmaceuticals production plant.
Outlook for 2017 (provided on 8 February 2017)
Net sales are estimated to be at similar level to 2016 (net sales were EUR 1,074 million in 2016).
Operating profit excluding material capital gains is estimated to be at least EUR 280 million (operating profit excluding capital gains was EUR 293 million in 2016).
Basis for outlook
Orion's branded Parkinson's drugs are Comtess ® , Comtan ® and Stalevo ® . Generic competition to these products commenced in the United States in 2012 and has already extended to nearly all markets. As a result of the competition, Orion's sales of these products have decreased to low levels in the United States and some other markets, and competition is expected to extend gradually. However, in 2017 growth in sales of other products is expected to continue to compensate for the decline in sales of these products. Sales of the Easyhaler product family are forecast to continue to grow. Orion has become aware that in some European countries marketing authorisation has been granted for a generic version of Dexdor ® , and in Germany a generic version of the product has been launched in the market. Orion is continuing actions to defend its rights. The impact of generic competition on sales is still difficult to estimate at this stage. The patent for the Simdax ® molecule expired in September 2015 but this is still not expected to have a material impact on sales of the product in 2017.
Sales of generic products account for a significant proportion of Orion's total sales, and price competition has continued in many markets. Competition in Finland, the most important generic market for Orion, will remain intense in 2017. In addition, at the beginning of the current year in Finland changes were made to the pricing system for substitutable prescription drugs by narrowing the so-called price band. The estimated negative impact of this change on Orion's sales has been taken into account in the outlook estimate. However, product launches continue to support Orion's position as market leader. In 2016 sales of Remsima ® generated a significant portion of the growth in net sales of the Speciality Products business division. Sales of Remsima in 2017 are expected to grow from the previous year.
Collaboration agreements with other pharmaceutical companies are an important component of Orion's business model. Often payments related to these agreements, which vary greatly from year to year, are recorded in net sales. Forecasting the timing and amount of payments is difficult. Possible future payments relating to agreements already made have in some cases been conditional on, for instance, the progress of research projects or results received, which are not known until studies have been completed. On the other hand, making new agreements is generally a process for which neither the schedule nor the outcome is known before the final signing of the agreement.
The Group's total capital expenditure in 2017 is expected to be higher than in 2016, when it was EUR 51 million. The largest single ongoing projects are expansion of Fermion's Hanko manufacturing plant and increasing Easyhaler product portfolio production capacity in Espoo.
Marketing expenditure will be higher than in the previous year due to additional promotion of sales from the Easyhaler product portfolio, for example. Because the registrations and launches of new products are projects that take more than a year, the increases in resources and other inputs required in 2017 were planned mainly during the previous year.
Research and development costs will be similar to 2016. They are partly the Company's internal fixed cost items, such as salaries and maintenance of the operating infrastructure, and partly external variable costs. External costs arise from, among other things, long-term clinical trials, which are typically performed in clinics located in several countries. The most important clinical trials scheduled for 2017 are either ongoing from the previous year or at an advanced stage of planning, therefore their cost level can be estimated rather accurately. The accrued costs are materially affected by collaboration arrangements and how the costs arising are allocated between Orion and its collaboration partners. For instance, Bayer is paying the majority of the darolutamide (ODM-201) research costs.
Near-term risks and uncertainties
Sales of Orion's branded Parkinson's drugs will decrease in 2017 due to generic competition. The effects of the competition have been taken into account in the outlook estimate for the current year. However, the timing of the extension and intensity of generic competition to Stalevo in Europe and elsewhere still entails uncertainty that may materially affect the accuracy of the estimate made at this stage. The basic Simdax and Dexdor patents have expired. However, the products have other still valid product protection. Nevertheless, for these products there is a possibility that generic competition might commence before expiry of the respective product protection. Orion has become aware that in some European countries marketing authorisation has been granted for a generic version of Dexdor, and in Germany a generic version of the product has been launched in the market. Orion is continuing actions to defend its rights. The impact of generic competition on sales is still difficult to estimate at this stage.
Sales of individual products and also Orion's sales in individual markets may vary, for example depending on the extent to which the ever-tougher price and other competition prevailing in pharmaceutical markets in recent years will specifically focus on Orion's products. Deliveries of Parkinson's drugs to Novartis, the most important collaboration partner, are based on timetables that are jointly agreed in advance. Nevertheless, they can change, for example as a consequence of decisions by Novartis concerning among others adjustments of stock levels. In addition, changes in market prices and exchange rates affect the value of deliveries to Novartis.
The exchange rate risk due to the US dollar has decreased in recent years because the share of Orion's net sales invoiced in dollars has fallen to below ten per cent and at the same time the value of purchases in dollars has increased. The greatest exchange rate risk at present relates to European currencies such the Swedish crown and British pound. However, the overall effect of the risk due to currencies of European countries will be abated by the fact that Orion has organisations of its own in most of these countries, which means that in addition to sales income, there are also costs in these currencies. Changes in the Japanese yen exchange rate have become more important as sales of Parkinson's drugs in Japan have increased. The exchange rate effect related to the Russian rouble has increased due to the strong volatility of the currency. However, Russian sales are not a significant portion of Orion's entire net sales.
Orion's broad product range may cause risks to the delivery reliability and make it challenging to maintain the high quality standard required in production. Authorities and key customers in different countries undertake regular and detailed inspections of development and manufacturing of drugs at Orion's production sites. Any remedial actions that may be required may at least temporarily have effects that decrease delivery reliability and increase costs. Orion's product range also includes products manufactured by other pharmaceutical companies. Possible problems related to the delivery reliability or quality of the products of those manufacturers may cause a risk to Orion's delivery reliability.
Research projects always entail uncertainty factors that may either increase or decrease estimated costs. The projects may progress more slowly or faster than assumed, or they may be discontinued. Nonetheless, changes that may occur in ongoing clinical studies are reflected in costs relatively slowly, and they are not expected to have a material impact on earnings in the current year. Owing to the nature of the research process, the timetables and costs of new studies that are being started are known well in advance. They therefore typically do not lead to unexpected changes in the estimated cost structure. Orion generally undertakes the last, in other words Phase III, clinical trials in collaboration with other pharmaceutical companies. Commencement of these collaboration relationships and their structure also materially affect the schedule and cost level of research projects.
Collaboration arrangements are an important component of Orion's business model. Possible collaboration and licensing agreements related to these arrangements also often include payments to be recorded in net sales that may materially affect Orion's financial results. In 2014-2016 the annual payments varied from EUR 8 million to EUR 39 million. The payments may be subject to certain conditions relating to the development of research projects or sales, and whether these conditions are triggered and the timing of triggering always entail uncertainties.
Financial objectives (provided on 8 February 2017)
Through the financial objectives Orion aims to develop the Group's shareholder value and ensure financial stability and profitable growth. Orion's financial objectives are:
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Growing net sales more rapidly than growth of the pharmaceuticals market. Achievement of this objective requires continuous investment in development of the product portfolio.
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Maintaining profitability at a good level. The aim is operating profit that exceeds 25% of net sales.
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Keeping the equity ratio at least 50%.
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Distributing an annual dividend that in the next few years will be at least EUR 1.30 per share, and increasing the dividend in the long term.
Orion's dividend distribution policy
Orion's dividend distribution takes into account the distributable funds and the capital expenditure and other financial requirements in the medium and long term to achieve the financial objectives.
Shares and shareholders
On 30 June 2017 Orion had a total of 141,257,828 (141,257,828) shares, of which 37,266,346 (38,681,154) were A shares and 103,991,482 (102,576,674) B shares. The Group's share capital was EUR 92,238,541.46 (92,238,541.46). At the end of June 2017 Orion held 675,401 (783,366) B shares as treasury shares. On 30 June 2017 the aggregate number of votes conferred by the A and B shares was 848,643,001 (875,416,388) excluding treasury shares.
At the end of June 2017, Orion had 47,828 (48,789) registered shareholders.
Voting rights conferred by shares
Each A share entitles its holder to twenty (20) votes at General Meetings of Shareholders and each B share one (1) vote. However, a shareholder cannot vote more than 1/20 of the aggregate number of votes from the different share classes represented at a General Meeting of Shareholders. The Company itself and Orion Pension Fund do not have the right to vote at an Orion Corporation General Meeting of Shareholders.
Both share classes, A and B, confer equal rights to the Company's assets and dividends.
Conversion of shares
The Articles of Association entitle shareholders to demand the conversion of their A shares to B shares within the limitation on the maximum number of shares of a class. In January-June 2017 in total 1,027,808 shares were converted.
Trading in Orion's shares
Orion's A shares and B shares are quoted on Nasdaq Helsinki in the Large Cap group under the Healthcare sector heading under the trading codes ORNAV and ORNBV. Trading in both of the Company's share classes commenced on 3 July 2006, and information on trading in the Company's shares has been available since this date.
On 30 June 2017 the market capitalisation of the Company's shares, excluding treasury shares, was EUR 7,853 million.
Orion shares are also traded on various alternative trading platforms in addition to Nasdaq Helsinki.
Authorisations of the Board of Directors
Orion's Board of Directors was authorised by the Annual General Meeting on 22 March 2016 to decide on acquisition of shares in the Company and on a share issue in which shares held by the Company can be conveyed. The authorisation to acquire shares was utilised during 2016. The terms and conditions of the authorisation were reported in more detail in a stock exchange release on 22 March 2016.
The Board of Directors is not authorised to increase the share capital or to issue bonds with warrants or convertible bonds or stock options.
Share-based Incentive Plans
Orion has two currently operating share-based incentive plans for key persons of the Group, which were announced in stock exchange releases published on 5 February 2013 and 2 February 2016.
Share ownership
Orion's shares are in the book-entry system maintained by Euroclear Finland, and Euroclear Finland maintains Orion's official shareholder register.
At the end of June 2017, Orion had a total of 47,828 (48,789) registered shareholders, of whom 96% (96%) were private individuals holding 38% (40%) of the entire share stock and 61% (62%) of the total votes. There were altogether 65 (59) million nominee-registered and foreign-owned shares, which was 46% (42%) of all shares, and they conferred entitlement to 10% (9%) of the total votes.
At the end of June 2017 Orion held 675,401 (783,366) B shares as treasury shares, which is 0.48% (0.55%) of the Company's total share stock and 0.08% (0.09%) of the total votes.
Personnel
The average number of employees in the Orion Group in January-June 2017 was 3,518 (3,428). At the end of June 2017 the Group had a total of 3,633 (3,528) employees, of whom 2,952 (2,862) worked in Finland and 681 (666) outside Finland.
Salaries and other personnel expenses in January-June 2017 totalled EUR 112 (113) million.
Significant legal proceedings
Companies belonging to the Orion Group are parties to various legal disputes, which are not, however, considered to be significant legal proceedings for the Group.
Business Reviews
Pharmaceuticals
Review of human pharmaceuticals market
Finland is the most important individual market for Orion, generating about one-third of the total net sales. According to IMS Health statistics, Finnish wholesale of human pharmaceuticals in January-June 2017 was up by 1% on the previous year at EUR 1,131 (1,115) million. Orion was able to increase its sales faster than market growth, and strengthened its position as leader in marketing pharmaceuticals in Finland. According to statistics collected by IMS Health, Orion's wholesale of human pharmaceuticals in Finland in January-June 2017 amounted to EUR 147 (143) million, up by 2% compared with the previous year. Orion's market share of Finnish pharmaceuticals markets was 13% (13%).
The most important individual therapy area for Orion is still the treatment of Parkinson's disease. Orion's branded Parkinson's drugs containing entacapone (Stalevo ® , Comtess ® and Comtan ® ) account for slightly over 10% of the Group's net sales.
Total sales of Orion's branded Parkinson's drugs:
EUR or USD million | MAT3/2017 | MAT3/2016 | Change % | |
United States | USD | 8 | 11 | -21% |
Europe TOP 5 | EUR | 63 | 87 | -27% |
Japan | EUR | 79 | 68 | +16% |
Source: IMS Health pharmaceutical sales statistics MAT3/2017 (4/2016-3/2017) | ||||
Europe TOP 5: Germany, United Kingdom, France, Spain and Italy. |
Sales of Orion's branded Parkinson's drugs decreased in Europe due to commencement of generic competition. Sales increased in Japan, mainly due to growth in Stalevo, which was launched in that market in 2015.
According to IMS Health pharmaceutical sales statistics, in Europe total sales of the most common intravenous anaesthetics and intensive care sedatives (propofol, midazolam, remifentanil and dexmedetomidine) in the 12-month period ending in March 2017 were up by 1% at EUR 530 (527) million. According to IMS Health pharmaceutical sales statistics, sales of Orion's Dexdor ® intensive care sedative (dexmedetomidine) were up by 39% at EUR 53 (38) million in Europe.
Net sales and operating profit of the Pharmaceuticals business
In January-June 2017 the Pharmaceuticals business's net sales were EUR 526 (509) million and its operating profit was EUR 164 (165) million. Milestone payments accounted for EUR 8 (9) million of the net sales and operating profit, and they comprised payments related to marketing rights. The operating profit of the Pharmaceuticals business was 31% (32%) of the segment's net sales.
Net sales of Orion's top ten pharmaceuticals in January-June 2017 were up by 8% at EUR 246 (229) million. They accounted for 47%
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